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OTTAWA (Reuters) - Canada's banking regulator should license and approve all financial instruments available to investors in the country, even if they originate in the United States, a new report recommended on Wednesday.
The report by two economists at the Canadian Center for Policy Alternatives, a left-leaning think tank, also urged the rapid creation of a single securities regulator in Canada to make sure officials can properly monitor markets and detect risky behavior or excesses before they get out of control.
A single financial markets watchdog, replacing the 13 regional regulators now in place, is a key ambition of Finance Minister Jim Flaherty and would bring under federal jurisdiction the "shadow" banking sector. That unregulated sector once accounted for nearly half of all Canadian borrowing and includes non-bank lenders as well as hedge funds and securitized debt vehicles.
"The present climate of economic strain gives the finance minister his best opportunity to revise the historic error of placing money and banking under federal jurisdiction and not also including the regulation of all financial institutions, markets and instruments," wrote economists Douglas Peters, former chief economist at TD Bank, and Arthur Donner, a Toronto-based consultant.
Peters and Donner's contributions to the debate on regulatory reform come as policy-makers in Canada and globally debate the best way to make financial markets more transparent and to set up early warning systems to prevent future financial crises.
Flaherty has pushed for a single securities regulator but some provinces are pushing back, especially Quebec, which has threatened court action to thwart Ottawa's plan.
As a member of the G20 group of major industrial and emerging economies, Canada has pledged to improve its market oversight by taking a "macro-prudential" or system-wide view of risk rather than focusing on individual institutions. But policy-makers have been tight-lipped on what precise changes might be required in Canada.
The Office of the Superintendent of Financial Institutions, known as OSFI, now has a mandate to ensure that federally-regulated institutions have adequate capital.
If Ottawa sets up a nation-wide regulator, some other types of institutions that are now provincially regulated would be brought under the federal umbrella. Peters and Donner would like to see OSFI in charge of authorizing any investment instruments, including those that go unregulated now.
The report said the Canadian units of credit card companies Visa and Mastercard should also fall under federal regulation. Credit cards are now the largest form of consumer payment, they said, raising the risk of instability in the financial system.
Drawing on recommendations by the Bank for International Settlements for more transparency, the economists suggest regulators protect the general public from the riskiest assets by limiting the types of instruments available to different types of buyers, ranging from the average retail investor to the most sophisticated large institutions.
Ottawa should also consider new capital requirements on all financial institutions so that they build up enough capital to see them through bad times and also to prevent big players from dragging down the entire financial system if they sink.
Reporting by Louise Egan; Editing by Frank McGurty